Looming Lease Expirations Are Extra-Scary For Loan Market
Looming lease expirations are one of the biggest threats to the CRE loan market, particularly for office.
Lease expirations are one of the biggest threats to the loan market, according to a new analysis from Trepp. And that’s especially true for the office sector: nine major leases are set to expire in the coming months.
“The debate (is) fierce between those that believed office attendance would revert to pre-COVID levels over time and those that believed a hybrid model or permanent work-from-home would be the new normal,” Trepp’s Jack LaForge notes. “That debate is still unsettled, but many firms are opting to sublease space in the short term in order to avert costs in the remaining months of their lease. However, when those leases expire, firms will have a decision to make, and we have already seen dribbles of what looming lease expirations can do to the performance of loans.”
LaForge notes that the $88 million 1384 Broadway loan was recently added to the servicer watchlist. The collateral is a 220,927-square-foot office in Manhattan’s Midtown West and in 2021, the loan posted a DSCR (NCF) of 1.91x when occupancy was 77%. Occupancy increased to 80% in the first half of 2022 but DSCR tumbled to 0.73x. Watchlist notes state there are 11 tenants with near-term lease expirations representing 8.5% of the GLA, according to LaForge.
Trepp also notes emerging refinancing risks for maturing loans backed by CRE properties: “in Trepp’s monitoring of the CMBS market, maturity defaults have increased in prevalence,” LaForge says. ”For borrowers that are already struggling to pay off loans at their maturity date, the challenges of securing refinancing become even greater.”
One such example: the $800 million Starwood Lodging Hotel Portfolio loan, which missed its balloon date in October. The loan is split between one large single-asset single-borrower deal and two smaller conduit deals and had a five-year term with no extensions. Collateral is 138 US hotels, and watchlist comments last month indicated that the borrower was looking for an extension. Occupancy was 44% for the 12 months ending in June 2022, but watchlist comments suggest Q1 2022 occupancy was 64%, according to LaForge.
“Assets such as this with low occupancy and mediocre to poor DSCRs still should be monitored, as it would be harder for them to afford a new loan with less revenue and a higher coupon demand,” LaForge says.